Gold Stocks: Not just a Flash in the Pan
– Momentum Public Relations –
Why should investors consider investing in gold mining stocks? The answer is simple. Quality business ventures are always investment worthy. The challenge is that investors have to examine the fundamentals of each gold mining company and not get caught up in the hype.
Investment in gold mining companies tends to gather momentum as the price of gold bullion rises. The excitement of a rising commodity can replace the discipline of evaluating investments. When bullion prices are high almost any mining company that can extract a few ounces of gold will make a bit of money. However, when prices fall, there is a reality check and investors often rush to sell all gold stocks. When they do, there is little distinction between marginal plays in exploratory companies with “potential” and producers with multiple locations that are truly well run gold mining concerns.
Everyone can claim to have an opinion, but nobody can predict the future. Many analysts argue that if you decide that a security is not a BUY, then it must be a SELL. There is, of course, a gap between these two conditions. Some call it HOLD. This may be one of those times for some investors to sit tight and HOLD their positions in gold mining stocks. Others may wish to BUY more. However, it may be a splendid time for those who are thinking about investment options to get into the market and BUY gold mining stocks.
There are lots of charts and graphs that can be accessed on the internet that claim to evaluate investment trends in gold. Charts can be quite confusing at times and if you look at more than one chart, confusion doubles or triples. So investors may want to avoid complex analysis and predictive indices that are hard to follow.
Investors can pay attention to three fundamental metrics. First, it is important to calculate the fully loaded cost of production per ounce of gold. A lower cost of production means that even if the commodity price for gold drops the operation can still be profitable.
Second, using spot gold pricing and the current published evaluation of a company’s proven reserves, investors should calculate the NAV ratio (net asset value over share price). This avoids the trap of exclusively evaluating a company’s income statement. Instead, the NAV ratio looks at the value of the assets it holds in relation to the share value at a moment in time.
Third, investors should examine the current ratio of price to cash flow and compare this to the company’s peer group. If the stock price for two companies is $20 per share and one company has a cash flow of $5 per share (20/5=4) and the other company has a cash flow of $10 per share (20/10=2). Using this metric, the company with the lower ratio, (P/CF=2) represents a better value.
The fact is that many Canadian gold producers are fundamentally sound investments and have significant upside potential at current gold bullion prices. Many companies are low to medium cost operators, and many have diverse operations in different areas. Yamana, B2Gold, Alamos, and Torex are examples of well capitalized gold producers that are trading well below their 52-week highs.
If investors are looking to make money in the short term, they should consider the typical seasonality of gold bullion pricing. For example, it has a tendency to rise in conjunction with India’s festival season when gifts of gold are exchanged. If gold prices rise in September, and this has happened in the past, it may well elevate the prices of Canadian gold mining stocks.
For the longer term investor, gold mining stocks are reliable. Yes, there have been bubbles and corrections, but gold is here to stay. The product may shine but gold mining stocks are no flash in the pan!